Question

Amazon ltd produces three products; A, B, C and D using the same processing plant. The following information relates to the company:

Product                                  A                     B                     C                     D

Units produced                      2,000               20,000             2,400               28,000

Material cost per unit (sh)    20                    20                    64                    68

Labour hours per unit                      2                      2                      8                      6

Machine hours per unit        1                      1                      4                      6

Labour cost per unit (sh)      12                    12                    48                    36

The cost accountant analysed the production overheads recorded under the following headings:

Overhead cost element                                              Amount (sh)

Setup costs                                                                 17,420,000

Factory costs (machine oriented activity)                149,696,000

Cost of ordering materials                                        7,680,000

Materials handling costs                                           30,320,000

Administration cost for spare parts                         34,400,000

Investigations into the production overhead activities for the period reveal the following:

Product                                  A                     B                     C                     D

Number of set-ups                 4                      24                    8                      32

Number of material orders 4                      32                    4                      32

Number of times material

Was handled                          8                      40                    12                    48

Number of spare parts used 8                      20                    4                      16

Required:

Unit cost per product using the machine hour rate                       

Unit cost per product using the activity based costing                  

Outline the shortfalls of activity based costing                              

Answer 1

		Product	A	B	C	D			Product	A	B	C	D
		Units Produced	2000	20000	2400	28000			Labor Hour PU	2.00	2.00	8.00	6.00
		Material Cost PU	20.00	20.00	64.00	68.00			Machine Hour PU	1.00	1.00	4.00	6.00
		Labor Cost PU	12.00	12.00	48.00	36.00
									Overhead Cost Element:	Amount	Activity	Total Activity	Per Activity Rate
		Overhead Cost Element:	A	B	C	D	Total		Setup Cost	17420000	No of Setup Ups	1403200	12.41
		No of Setup Ups	4	24	8	32	68		Factory Cost(Machine)	149696000	Machine HourTotal	199600	749.98
		No of Material Order	4	32	4	32	72		Cost of Ordering	7680000	No of Material Order	1553600	4.94
		No of Material Handling	8	40	12	48	108		Material Handling	30320000	No of Material Handling	2188800	13.85
		No of Spare Parts	8	20	4	16	48		Admisitrative Cost	34400000	No of Spare Parts	873600	39.38
									TotalCost	239516000
		Overhead Cost Element:	A	B	C	D	Total
		No of Setup Ups	8000	480000	19200	896000	1403200		Total Machine Hours	199600
		No of Material Order	8000	640000	9600	896000	1553600
		No of Material Handling	16000	800000	28800	1344000	2188800		Overhead Per MH	1,200.0
		No of Spare Parts	16000	400000	9600	448000	873600
									Product	A	B	C	D
									Machine Hour PU	1.00	1.00	4.00	6.00
									Units Produced	2000	20000	2400	28000
		Unit Cost Using MH:							Total Machine Hours	2000	20000	9600	168000
	1	Product	A	B	C	D			Total Machine Hours	199600
		Material Cost PU	20	20	64	68
		Labor Cost PU	12	12	48	36
		Overhead Cost Allocated	1200	1200	4800	7200
		(MH Per Unit*1200)
		Total Cost	1232	1232	4912	7304
	2	Unit Cost Using ABC:
		Product	A	B	C	D
		Material Cost PU	20	20	64	68
		Labor Cost PU	12	12	48	36
		Allocated Costs:
		Setup Cost	49.66	297.95	99.32	397.26	(Each Activity* Rate Per Activity)
		Factory Cost(Machine)	749.98	749.98	2,999.92	4,499.88	(Each Activity* Rate Per Activity)
		Cost of Ordering	19.77	158.19	19.77	158.19	(Each Activity* Rate Per Activity)
		Material Handling	111	554	166	665	(Each Activity* Rate Per Activity)
		Admisitrative Cost	315	788	158	630	(Each Activity* Rate Per Activity)
		Total Cost	1277	2580	3555	6454
	3	Shortfalls of ABC System:
	a	ABC is very Costly to implement and maintain
	b	ABC Produces reports that are very much different from Traditional Costing
	c	As many of the organisations are using Traditional System and any organisation using ABC makes the Financial Statements in comparable